Franklin, TN asked in Tax Law for Tennessee

Q: Do I have to pay taxes on my profit on my home I just sold?

Owned for 31 years. Lived there until 3 years ago. I am a widow and soon be 59 years old

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2 Lawyer Answers
Anthony M. Avery
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  • Tax Law Lawyer
  • Knoxville, TN
  • Licensed in Tennessee

A: You are probably exempted from the capital gains tax as you were 55 during the last 5 years of living there as your home. But you still have to report the sale, and you might not meet the one time exclusion because of your age. Check IRS Publication 523.

D. Steven Yahnian
D. Steven Yahnian

A: The good news is your age is not a factor. Instead, the requirements involve how much gain on sale results, how long you owned the property and used it as a residence in the 5 years prior to sale.

Under the home-sale exclusion rule, you may be able to exclude a portion, or possibly all, of the gain realized from the sale of your home if your home met the principal residence rules.

During the five-year period ending on the date of the sale you must have owned and used the property as your principal residence for a period aggregating two or more years. You need not have lived there continuously to qualify. You may use the exclusion provided the eligibility requirements are met, but generally no more frequently than once every two years.

The amount of the exclusion is generally limited to $250,000 for single individuals and married individuals filing separately. The exclusion is increased to $500,000 in the case of married couples filing a joint return, where at least one spouse meets the ownership requirement, both spouses meet the use requirement, and neither spouse is ineligible for the benefits because he or she excluded gain on the sale or exchange of a home under the new provision within the past two years. The $500,000 exclusion amount also applies to a sale by a surviving spouse within two years of the death of the deceased spouse provided the ownership and use requirements are otherwise met. If a taxpayer marries someone who is ineligible, the taxpayer generally remains eligible for a maximum exclusion of $250,000.

If you fail to meet the ownership and use requirements due to a change in place of employment, health, or other unforeseen circumstances, you may exclude a fraction of the $250,000 ($500,000) amount.

Special rules apply in determining ownership and use if you are receiving out-of-residence care, inheriting property from a spouse, transferring property pursuant to a divorce, or disposing of property where the rollover rules applied.

The exclusion rule also generally applies to the sale of a remainder interest in a principal residence, if all the other requirements are met. Thus, you may retain a life estate in your home while selling the remainder interest.

The exclusion rule requires gain recognition to the extent of any depreciation taken after May 6, 1997, for the rental or business use of your home. Thus, if you used part of your home as an office during the time you owned it, you will have to recapture that depreciation, even if the rest of the gain can be excluded.

If you have a gain in excess of $250,000 ($500,000 if married filing jointly) when you sell your home, you will be liable for income tax on the excess gain in the year of sale.

No deduction is allowed if your home is sold at a loss because a home is a personal use asset under the tax law. Losses can only be taken on business assets.

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